-- Centene Corp. recently announced that its operating results
likely will be significantly worse than expected, which has reduced financial
results for full-year 2012.
-- We are revising our outlook on Centene to negative from positive and
affirming the ratings.
-- We could lower the rating by one notch if the company continues to
post poor results.
On June 11, 2012, Standard & Poor's Ratings Services revised its outlook on
Centene Corp. (CNC) to negative from positive. At the same time, we affirmed
our 'BB' long-term counterparty credit and senior unsecured debt ratings on
The outlook revision resulted from Centene's announcement that it expects
year-to-date June operating results to be significantly worse than
expectations, which will affect financial results for full-year 2012. The
results were driven by higher-than-expected medical costs in its Kentucky
Health Plan and the Hidalgo service area in its Texas Health Plan, as well as
in the Celtic individual health business.
We have revised our adjusted EBIT return on revenues (ROR) margin expectations
for 2012 to about 2% from the 3%-4% range. EBITDA interest coverage (including
imputed lease obligations interest) would diminish to about 7x from our
previous expectation of 10x. We believe that the expected EBIT margin (about
2%), EBITDA interest coverage (about 8x), and debt leverage (20%-30%) remain
supportive of the current rating.
Centene has produced very stable and good operating performance during the
past five years. Centene's adjusted EBIT ROR in 2011 was about 4%, and its
five-year (2007-2011) average ROR was also 4%.
Our counterparty credit rating on Centene is constrained by the concentration
of its revenue stream in the government-sponsored managed Medicaid programs,
with a smaller percentage of premiums coming from specialty services from
external customers. This narrow market focus is a key credit risk, as it
exposes the company to adverse regulatory and legislative developments.
Accordingly, profitability and sustained revenue growth depend heavily on
continued government funding for these programs to keep pace with medical cost
The negative outlook indicates that we could lower the rating by one notch if
the company's EBIT ROR were to decline to less than 2% for a sustained period
or if the loss of one or more of its managed Medicaid contracts resulted in a
significant decline in revenue or cash flow from operations. We will consider
the new expected level of profitability the reason for the change. If we lower
the counterparty credit rating, we would likely also lower the senior debt
ratings by one notch.
We expect the company to continue to grow and generate stable cash flow in the
intermediate term (12 to 24 months) to meet its debt-service requirements and
pay for expenses related to expansion into new markets. In addition, we expect
the company to keep its debt-to-capital ratio consistent with recent
improvements in the 20%-30% range--barring any large acquisitions. We expect
EBITDA interest coverage to remain at least 7x and redundancy of statutory
capitalization to stay at the 'BBB' level of confidence as per our capital
model. We remain concerned that any significant funding cuts and continued
pressure from reimbursement rate compression by states to save money could
erode the earnings power from the managed Medicaid sector. Benefits structure
and eligibility must be aligned with reimbursement levels.
Related Criteria And Research
-- Analysis Of Insurer Capital Adequacy, Dec. 18, 2009
-- Holding Company Analysis, June 11, 2009
-- Analysis Of Nonlife Insurance Operating Performance, April 22, 2009
-- Investments, April 22, 2009
-- Double Leverage In Health Insurance, Aug. 6, 2008
Ratings Affirmed; Outlook Action
Counterparty Credit Rating
Local Currency BB/Negative/-- BB/Positive/--
Senior Unsecured BB